Market Structure of a Monopoly Organization - Essay Example

Market Structure and Section # of HOW AN ORGANIZATION BECOMES A MONOPOLY? Sometimes in an economic environment, a situation occurs, in which a single individual or organization has an almost total control over the industry of a specific product or service. In such a scenario, it has the ability to determine the rules and regulations of the industry, laws of doing business and lobbying the government and related parties for their benefit. Usually, such firms are powerful enough that they have a firm hold over the market. This prevents other firms from entering the market and even if they do so, it makes their stay in the market very difficult due to the strong hold of the said organization this type of market existence, in which the firm has the strongest hold over the industry, is called monopoly. (McConnell, Brue, 2006). There are two types of monopolies. Natural Monopoly exists when an organization possesses a strategic control over assets or production, operations and/or distribution systems pertaining its particular product or industry. (Brakman, Heijdra, 2004). For example, an organization providing the government with the nuclear power plant energy would have a natural monopoly since it is performing a task which is highly strategic in nature. On the other hand, Coercive Monopoly refers to any other type of monopoly that has been acquired deliberately. It includes erecting barriers for potential competitors to enter into the business, acquiring patents, mergers & acquisitions with the competitors to engulf competition, etc. (Brakman, Heijdra, 2004). Firms tend to acquire monopoly through following means: a) Barriers to Entry Firms often tend to achieve monopoly through erecting barriers for potential competitors to enter the market. These barriers may be of three types. The “economic barriers” include economies of scale (largely reducing costs through mass, full scale production), large capital requirements, technological superiority and absence of close substitute products. The “legal barriers” refer to intellectual property rights including patents, trademarks, copyrights, etc. which provide an organization with a strong edge over the competitors. Firms may also indulge in “deliberate action” including lobbying the government and concerned parties, collusion, etc. to acquire monopoly. (McConnell, Brue, 2006). b) Barriers to Exit The barriers like high liquidation costs that make it difficult for a firm to leave a business may also keep them from entering it enhancing the monopolistic effect of the already existing firm in the market. (McConnell, Brue, 2006). c) Mergers & Acquisitions Firms may also use mergers and acquisitions to engulf their competition an achieve a monopolistic control over the industry. (Brakman, Heijdra, 2004). d) Intellectual Property Rights – Patents Firms may acquire patents in order to secure their monopolistic presence. They may come up with any innovative idea or product and would get it patented. This will prevent the competitors to adopt the new idea or technology and hence monopoly will be created and maintained. (Scherer, 2005). 2. EFFECT OF PATENT ON MARKET STRUCTURE Patents are exclusive rights over a particular idea, technology or product granted to its inventor or creator by the concerned government bodies (usually the nation’s patent office or intellectual property office). The primary purpose of patents is not to provide a firm with the exclusive rights of using a product; rather it is to restrict any other firm from doing so. This provides the firm with a major competitive edge over the competitors. (Intellectual Property Office, 2009). However, it is highly dependent on the nature of the patent what level of monopoly it provides to the company. For example, if a patent is for a long period of time, has very strict restrictions for coming up with a different product but of a similar nature and the product does not have any close substitutes, in such a case the patent is very strong and would be able to provide the firm with a powerful monopolistic position in the market which would last longer. On the other hand, if a patent is for a shorter period of time, is not very strict about restricting the competitors from coming up with a different but similar product and the product may have many close substitute products, the firm may not be able to enjoy long term benefits of the patent. (Scherer, 2005). For example, the Intellectual Property office of the UK granted a patent to Geron Corporation (Incorporated in USA – Delaware) for producing “Dendritic cell vaccines made from embryonic stem cells for treating cancer”. The patent was filed on August 10, 2005, was printed by the UK office on May 2, 2007 and was published by the Intellectual Property Office of the UK on December 23, 2009. The inventors of the vaccine were Inventors: William D. Stempel, J. Michael Schiff, Jane S. Lebkowski, and Anish Sen Majumdar. (Intellectual Property Office, 2009). Cancer is a fast spreading disease these days and currently, a lot of work is being done to come up with effective cures and preventions of cancer. Moreover, people are becoming more and more aware of the disease and are inclined towards taking necessary precautionary steps to save themselves from this menace. In such times, if a firm comes up with a vaccine that can help treat cancer, it would be of great use. (Scherer, 2005). For a firm getting a patent for this vaccine, it provides them with an opportunity to capitalize on their product for as long as the patent lasts, i.e. 20years (or more if renewed) (Coyle, 2008) and would put them in a monopolistic position for the said category. It can also be a source of huge capital for the company if, after capitalizing on the product’s patent for some time, say 5-6 years or so, they decide to sell it to their competitors for a royalty or a license fee. (Scherer, 2005). Hence, the firm would be in a much stronger position than the rest of its competitors in terms of this particular product, i.e. Dendritic cell vaccines made from embryonic stem cells for treating cancer and can enjoy this monopoly for as long as their patent lasts or till they wish not to allow the competitors to use or manufacture the product. BIBLIOGRAPHY McConnell, C.; Brue, S. (2006). Economics. McGraw-Hill Irwin. Brakman, S.; Heijdra, B. (2004). The monopolistic competition revolution in retrospect. Cambridge University Press. Scherer, F. (2005). Patents: economics, policy, and measurement. Edward Elgar Publishing. Intellectual Property Office. (2009). UK Patent - Dendritic cell vaccines made from embryonic stem cells for treating cancer. Journal Number: 6292. Publication Number: GB2431582. Publication Date: 23 December, 2009. Available from http://www.ipo.gov.uk/p-find-publication-result?PatentNo=GB2431582&JournalNumber=0&EarliestYear=2005&EarliestWeek=1&LatestYear=2099&LatestWeek=53&DocTypes=B&ResultsPerPage=50&Start=0&epj=y [Accessed April 27, 2010] Coyle, J. (2008). Types of Patent and Their Duration. Available from http://www.lawdit.co.uk/reading_room/room/view_article.asp?name=../articles/8072-JC-types-of-patents-and-thier-duration.htm [Accessed April 27, 2010] Read More